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Capital Market and Portfolio Management
September 2022 Examination
Q1. Efficient market
hypothesis repudiates the technical analysis by arguing that no abnormal
returns can be earned by using three different forms of information. In the
light of this statement, discuss the three forms of EMH, and comment on their
validity in the stock markets in contemporary periods. (10 Marks)
Ans 1.
Introduction
The Efficient Market
Hypothesis (EMH) fundamentally asserts that the prices of investment
securities, such as stocks, already take into account all available information
regarding those securities. If so, no
amount of study will be able to provide you an advantage over "the
market." Investors need not be logical; according to EMH, each investor
will behave arbitrarily. However, the market is always "correct"
overall. Simply put, the word "efficient" implies the word "normal.
For instance, a strange response to a strange piece of information is typical.
It's typical for you to
Q2. From the following information
about two portfolios, explain which one offers a better investment option based
on the Sharpe ratio. (10 Marks)
|
|
Portfolio X |
Portfolio Y |
|
Annual Return (Rp) |
7.6% |
8.9% |
|
Risk-free Return (Rf) |
5% |
5% |
|
Standard deviation of
portfolio’s return (ơp) |
0.12 |
0.23 |
Ans 2.
Introduction
William F. Sharpe, winner
of the Nobel Prize in economics, is credited with developing the Sharpe ratio,
which is a tool utilized by investors to better comprehend the return of an
investment in comparison to the risk involved. The ratio is the average return
earned over and above the risk-free rate, expressed as a percentage of the
total risk or volatility taken on. A measure of the price swings of an asset or
portfolio is referred to as its volatility. The Sharpe ratio corrects the
historical performance of a portfolio, or its predicted future performance, for
Q3. On seeing the report of Company,
A, we found that the “EVA rises 224% to Rs.71 Crore” whereas Company B’s “EVA
rises 50% to 548 crore”
a. Define EVA, and discuss its significance. (5 Marks)
Ans 3a.
Introduction
The incremental difference
between a company's rate of return (RoR) and its cost of capital is called EVA.
It basically serves as a gauge for the value that investments in a firm
produce. A negative EVA indicates that a company is not making money from the
capital put in the enterprise. A corporation is demonstrating value from the
money invested in it if its EVA is
b. Comparatively analyze EVA in
relation with measures like EPS or ROE? Is EVA suitable in Indian Context? (5 Marks)
Ans 3b.
Introduction
According to Laing (2015),
comparing the coefficients of determination (R2) reveals that the EPS is
significantly related whereas the ROE is not. More crucially, the EVA
coefficient is not significant, hence the null hypothesis cannot be rejected,
but rather upheld. That is, EVA's
behavioral finance: A review of rationality
to irrationality. Materials Today: Proceedings.
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